How to stop a letter of credit payment for fraud in the UAE

• A UAE bank must pay against compliant documents, whatever the dispute about the goods.
• A court will stop payment only where the beneficiary's own fraud is shown by conclusive evidence.
• The onshore route is a provisional attachment on the credit amount, ordered by the summary judge.
• Once the bank has paid, the attachment route closes and the claim moves to the underlying contract.

Why a bank pays even when the goods are wrong

Articles 429 to 440 of Federal Decree-Law No. 50 of 2022 govern documentary credits. They treat the credit as a separate undertaking by the bank, independent of the sale contract behind it. Most credits also incorporate UCP 600, which states that banks deal in documents and not in goods. Our commercial litigators in Dubai act for applicants seeking to stop payment and for beneficiaries resisting those applications.

The consequence is simple and, for a buyer holding defective goods, unwelcome. A buyer that receives defective goods cannot instruct its bank to refuse payment where the documents comply. The bank examines paper, and the dispute about the cargo belongs to the sale contract.

The operational side of documentary credits, including presentation and discrepancies, is covered in our guide to letters of credit in UAE trade. The Central Bank rulebook sets the prudential standards banks apply when issuing them.

The statutory opening for a court order

Article 417 of the Commercial Transactions Law prohibits a bank from refusing payment for reasons arising from its relationship with the applicant. The same applies to reasons arising from the applicant's relationship with the beneficiary.

The same article then creates the exception. A bank may refrain from payment where an enforceable order or court judgment imposes seizure on the amount held by the bank. For that order to be made, the applicant must base its claim on serious and confirmed grounds.

Article 417 appears in the part of the law dealing with letters of guarantee. In Cassation No. 515 of 2014, decided on 6 March 2016, the Dubai Court of Cassation applied the same principle to documentary credits. The mechanism for guarantees is described in our article on bank guarantees in UAE commercial contracts.

The three kinds of fraud the courts accept

UAE decisions on documentary credits recognise three grounds that displace the bank's obligation. They are fraud by the beneficiary, forgery of the documents, and a conclusive document proving the beneficiary has no entitlement.

Fraud was established in Cassation No. 226 of 2010, decided on 4 January 2011. A contractor on a 1,515 villa project had opened a credit for AED 34,000,000 in favour of a subcontractor. The subcontract fixed unit prices for its full term, yet three later invoices charged higher rates and added USD 1,102,476. The court suspended payment of the excess only, because the fraud lay in the inflated amount rather than in the whole invoice.

In Cassation No. 85 of 2011, decided on 7 March 2012, the shipping documents presented under a credit for plant machinery showed a complete consignment. The containers arrived without the units described in six clauses of the contract. The discrepancy between the documents and the delivery, together with the seller's own acknowledgment, established fraud.

Forgery was established before the Federal Supreme Court in Cassation No. 772 of Judicial Year 24, decided on 23 October 2005. The beneficiary under a credit for Indian black tea had replaced the second page of an inspection certificate. The substitute page bore a different number and date. Payment made against the forged certificate had to be returned.

A conclusive document was enough in Cassation No. 249 of 2001. A buyer of cashew nuts found the goods unfit for human consumption, and Dubai Municipality refused them entry. The summary judge ordered attachment of the credit amount of AED 238,507.50 on that basis. The import side of that position is covered in our guide to importing goods to Dubai.

What the courts will not treat as fraud

A breach of the sale contract is not fraud. Nor is a dispute about quality, a late delivery, or a suspicion that the seller acted in bad faith.

The decisions also impose two conditions. The fraud must be the beneficiary's own, and fraud by a third party in the chain does not displace the bank's obligation. The evidence must also be ready and conclusive when the application is made. An application that asks the court to investigate, appoint an expert or hear witnesses first will fail. It contradicts the urgent nature of the remedy.

That second condition shapes everything. The applicant needs a document that proves the point by itself. Examples are a price schedule contradicting an invoice, an official rejection of the goods, or a certificate that does not match its own first page.

Why timing decides the application

In Appeal No. 606 of 2018, decided on 16 April 2019, the Dubai Court of Appeal refused to suspend a credit of EUR 1,100,000. The bank had already paid.

The facts showed fraud. The buyer had ordered four production line machines for delivery to Sudan, and the seller shipped one. The seller's manager then presented documents that led the bank to believe the full consignment had gone, and drew the whole credit. The court held the seller responsible, but the attachment route had closed, and the buyer's only remedy lay under the supply contract.

The attachment itself is made under the provisional attachment provisions of Federal Decree-Law No. 42 of 2022. The applicant must then pursue the substantive claim promptly. An attachment granted and then left without a substantive case behind it will not hold the funds.

The DIFC route

The DIFC Courts offer a separate route where the credit or the underlying contract falls within their jurisdiction. The applicant may seek an injunction under Part 25 of the Rules of the DIFC Courts.

The DIFC Courts apply common law principles to the fraud exception, which set a similarly high threshold. The evidential burden is comparable to the onshore standard. The applicant must also give an undertaking in damages and full disclosure of every material fact.

What to prepare before applying

• Assemble the document that proves the fraud by itself, since the court will not investigate for you.
• Confirm the fraud is attributable to the beneficiary itself, and not to a carrier or inspector.
• Establish whether the bank has already paid, because that decides whether attachment is available at all.
• Obtain the credit, the sale contract and every document presented, in certified Arabic translation for onshore proceedings.
• Prepare the substantive claim in parallel, so the attachment has a case to support it.

Where the credit supports a construction subcontract, the attachment route interacts with payment certification and set-off. Our article on payment disputes in UAE construction projects covers that interaction. Receivables paid through a credit fall outside the factoring regime, explained in our article on the UAE factoring law for exporters.

When does the fraud exception stop a letter of credit in the UAE?

The exception is real, and the courts have applied it across three decades. It operates within narrow limits: the beneficiary's own fraud, proved by a document available on the day of the application, before the bank pays.

Most failed applications fail on the last two. A buyer who can see the fraud but cannot yet prove it on paper is left with a claim under the sale contract. So is a buyer who moves after the bank has released the funds. That claim may succeed, but it is a claim against the seller rather than a hold on the money.

Legal advice may be required to assess whether particular evidence meets the threshold and whether an application can be made in time.

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